‘Flying Geese’ and Regional Production Networks

Min Shu

Waseda University

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Outline of the lecture

• Economic regionalization in East Asia

• The origin of regional production

• Intra-regional FDI in East Asia

• East Asian developmental state transformed

• The ‘flying geese’ model

• The formation of regional production networks

• Evolving regional production networks in East Asia

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Economic regionalization in East Asia

• The growth of intra-regional trade in East Asia (including ASEAN+3, Hong Kong and Taiwan)

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Economic regionalization in East Asia

• Mid-1980s marked the start of a significant increase of intra-regional trade within East Asia

• The upward trend of intra-regional trade was interrupted twice, first in the late 1990s and then in the late 2000s

• Entering a relatively stable plateau around 50% after 2010

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Comparing with other regional blocs

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Economic regionalization in East Asia

• Puzzles one: Economic regionalization in East Asia reached a substantial level in the late 1990s despite the lack of regional trade agreements and regional institutions• A business-led spontaneous process of economic regionalization?

• Puzzle two: Asian financial crisis (1997-98) accelerated economic regionalization; yet, the global financial crisis (2007~08) slowed down the upward trend• After-shock adjustment or regionalization slowdown?

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The origin of regional production

• In the early 1980s, East Asian economies experienced two major global shocks • For developing East Asia, the fall of the commodity prices in the early and

mid-1980s

• For industrialized East Asia, currency appreciation against the USD in the mid-and late 1980s

• The falling commodity (oil, metal, food, etc.) prices were a result of the economic slowdown of the developed world in the early 1980s

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0

50

100

150

200

250

300

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Selected Southeast Asia Commodity Prices 1980-1990

Rice, Thailand Tropical sawnwood, Malaysia

Plywood, Africa & South East Asia Rubber, Singapore

Tin, Kuala Lumpur Crude petroleum

The origin of regional production

• The appreciation of industrialized economies in East Asia (incl. JPY, TWD, KRW) after the Plaza Accord in 1985

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• By contrast, developing East Asia’s currencies were relatively stable

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The origin of regional production

• These shocks led to major domestic adjustment of East Asian economies • Developing East Asia: from a combination of commodity export and

import-substitution industrialization to an FDI-based export-oriented growth strategy

• Industrialized East Asia: from the sporadic relocation of sunset industries to large-scale outflow of the manufacturing capitals

• At the regional level, massive intra-regional capital flow from industrialized East Asia to their developing neighbors

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Intra-Regional FDI after the mid-1980s

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Intra-Regional FDI after the mid-1980s

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Asian developmental state transformed

• The prototype developmental states• Japan, Korea, Taiwan and Singapore• Before economic regionalization: limited use of FDIs and restricting capital outflow;

‘welfare through work’ (corporate-based welfare schemes)• After economic regionalization: supporting and assisting capital outflow; shrinking

domestic employment

• The emerging developmental states• ASEAN-4 and mainland China• Before economic regionalization: public investment and SOEs; state support based

on ideological or ethnic grounds• After economic regionalization: extensive use of FDIs; dualist economic structure

(with protected domestic sectors)

• Business has moved beyond the state

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The ‘flying geese’ model

• The ‘flying geese’ model of regional production• The transfer of sunset industries to less developed economies according to

the changing environment of comparative advantages

• Theoretical connections• Compatible with the developmental

state’s industrial policy

• In line with the product lifecycle model

• Advantages• Preserving leading country’s technological advantage

• Countries move to a suitable stage of specialization

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The ‘flying geese’ model

• However, two business models incompatible with the ‘flying geese’• Selective and closed relocation (the Japanese model)

• The transfer of low-end production• Maintaining the supply of key component products• Relocating the whole production cluster(s) Host country finds it difficult to improve product sophistication and economic capacity

• Open network and production localization (the US model)• The local suppliers of component products• Collaboration between foreign branches and local suppliers• Market transaction-based production network Host country develops technologies, but specialized only in component production

• Regional production based on multinational competition

• From horizontal to vertical intra-industrial trade (IIT)

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Intra-Regional FDI after the AFC (1997)

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Regional production networks in East Asia

• Production modularization and fragmentation in machinery manufacturing (firm-level factors)• Machinery products have many parts and components • Parts and components standardization• The service links improved• Growing importance of OEM and EMS providers

• Unilateral trade and investment liberalization (state-level factors)• A shrinking negative list for FDIs• FDI-friendly policies: duty-drawback, export processing zones, industrial

parks, and infrastructure development• ‘Binding overhang’ and the de facto PTA in East Asia (Hale, 2011)

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Regional production networks in East Asia

• Regional production networks in machinery goods• Rapid increase of intra-reginal trade• Trade growth in both final and component products• back-and-forth transactions in vertical production networks• Impact of the Asian financial crisis was minimal

• Developing East Asia• Overall trade deficit in machinery goods• Deficit in part and component trade

• Industrialized East Asia• Overall trade surplus in machinery goods• Surplus in part and component trade

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Regional production networks in East Asia

• Intra-regional trade in machinery goods and machinery parts and components (1989-2002) Source: Ando (2006)

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Evolving regional production networks

• The changing direction of supply chains in East Asia and beyond

• Changing patterns of the regional production networks• 1985: resource-based supply chains that drew resources from Malaysia and

Indonesia to Japan

• 1990: Japan-centered supply chains that brought intermediate products from Japan to Korea, Taiwan, Malaysia, Thailand and Singapore

• 1995: US entered the East Asian production networks by drawing supplies, from Malaysia and Singapore,

• 2000: a tri-polar production network centered on Japan, China and the US

• 2005: China became the core market for intermediate products, drawing value-added exports from other East Asian economies

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Evolving regional production networks (source:IDE-JETRO)

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Intra-regional FDI after the GFC (2008)

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